Cryptocurrencies shine as rate hike bets slashed

Cryptocurrencies have remained largely unscathed by the recent risk-off trade that has hit stocks and crude oil. Fears over the efficacy of the vaccine over the Omicron variant intensified after overnight comments from the Moderna boss, leading to sharp falls in Asian markets and European indices first thing this morning. However, Oxford University said there’s no evidence of Omicron defeating the vaccine, which triggered a bit of a rebound for stocks and crude oil.

While many questions remain over the Omicron variant, crypto traders seem to just keep buying those dips. In part, this could be due to revised expectations about the speed of the taper. US Treasury yields have fallen sharply this week as investors have speculated that the Fed may not speed up the pace of bond purchases as it had previously indicated. Rising inflationary pressures had raised bets that the Fed will have to taper QE faster and raise rates sooner. But the new wave of Covid inflections and uncertainty over the latest variant has caused a sharp reversal in that thinking.

Now, money markets have pushed back their expectation of a first 25 basis-point rate hike to September 2022, compared to July last week. This has resulted in a drop in bond yields.

With yields weakening, the dollar has fallen against low-yielding currencies like the euro and yen. Non-interest-bearing gold has also risen along with the likes of Bitcoin and Ethereum, although less robustly.

In fact, ETH/USD looks like it wants to aim for new highs around $5000:


 
ETH/USD has broken above a short-term bearish trend line, and this has potentially paved the way for at least a re-test of the previous all-time high.

Meanwhile, Bitcoin was testing a key area of resistance between $58,500 to $60,000 (shaded in green):


If BTC/USD manages to reclaim the $60K hurdle on a daily closing basis then this would potentially pave the way for a run to a new all-time high near $70K next. Until that happens, it is best to proceed with a bit of care.